Can annuities work?

ChrisTobe

Chris Tobe, CFA, CAIA is a top expert on pension and 401(k) investing and is
an Senior Investment Consultant with the Hackett Group. He has been quoted
frequently on Stable Value in 401(k)s in the Wall Street Journal, Barron’s and
dozens of trade magazines and is working on a book on Stable Value. His recent
book on public pensions “Kentucky Fried Pensions” has been featured in the New
York Times and Rolling Stone.

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In previous columns I have been hard on annuities and other insurance products, primarily because of hidden fees and risks that are not compensated by enough return. Much of the old line insurance structure is bloated and burdened by a commission structure from the last century.

Annuities have two very important structural advantages. First a lifetime stream of income is very appealing to curb longevity risk. Second there are tax advantages which are especially helpful if you invest in active stock strategies with high turnover, which trigger capital gains in a taxable account.

On the institutional 401(k) side I have been impressed with Hueler Income Solutions which through an annuity bidding process gets rid of the some of the excess profits. On the individual side Jefferson National, founded by some former E-Trade execs, created an annuity product with a flat insurance fee of $20 a month.

The real savings in these products is that because they do not pay anyone a commission, the savings can be passed on to the investor. I am encouraged by this type of innovation in the annuity space — but am still cautious.

Whenever a financial person talks to you in person or concerning your plan at work, ask if there is a commission and who gets it, and ideally how much it is. While I still believe the majority of annuity and life insurance products have too much risk and too many fees for the return, if you are careful and ask a lot of questions you might just find one that can work.

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